Every small business aims to increase profits. Thinkers like Milton Friedman have even gone so far as to say that the sole responsibility of a business is to deliver profits to shareholders. Perhaps the most obvious way of doing this is to increase sales. Boosting sales will, of course, increase profits, but this strategy is not the only method that can be used to drive business growth. The most effective way of producing sustained growth is to increase your profit margin by reducing your variable cost. With the right awareness, reviewing your operations should enable you to identify viable areas for lowering variable costs and boost your bottom line.
Why Focus on Your Variable Costs?
Fixed costs are those which are not determined by the amount of work the company does. Fixed costs include rent, insurance, and salaries. Variable costs are directly related to business activity and supply-chains, such as raw materials and inventory. Businesses looking to boost their profit margin are advised to reduce variable costs, as cutting back on fixed costs is much more difficult to implement. Businesses should always look to reduce variable costs to increase profit margins and avoid the shutdown point, something especially relevant to manufacturers.
Review Return on Investment
The first step of reviewing your operations with an eye to reduce your variable costs is to scrutinize your products or services in terms of return on investment. This practice will help you to identify the areas that are the most and least cost-effective. A good ROI review will show you which costs need to be reduced and which lucrative operations warrant more investment.
Apply Lean Management Principles
Lean management aims to optimize workflows by reducing waste in business processes and maximizing the value of the product or service for the customer, without compromising on quality. There are five main principles to lean management. While all of the steps aim to produce more and reduce waste, the second, ‘the value stream,’ specifically targets reducing variable costs.
Question Your Business Expenses
To ensure that you are always looking to reduce the variable costs of your business, you must adopt an inquisitive mindset. An inquisitive attitude will help you consider every expense and ask how it adds value to your business and whether there is a more cost-effective alternative. This mindset helps businesses save money in unexpected ways, for example, with their water bills. The Scottish water market was opened up in 2011 due to a 2008 movement to deregulate the commercial water market, leading many businesses to change business water suppliers Scotland companies. This deregulation meant that many businesses might be able to make a saving of up to 45% of their water bill by switching suppliers. A water audit helps businesses to view market insights and identify competitor costs to reduce this variable cost.
Never Stop Monitoring Your Variable Costs
To ensure long-term sustained business growth, you should not view reviewing and reducing variable costs as a short-term solution. Businesses that wish to continue to grow and increase profit margins should constantly maintain the mindset of variable cost monitoring. To ensure that you are always doing all you can to help your business excel, you must continuously keep track of your finances and your returns on investments.